Reassessing DriveTime Risks: Why Allegations Don’t Change the Bull Case for Carvana

In a report released yesterday, Marvin Fong from BTIG maintained a Buy rating on Carvana Co, with a price target of $535.00.

Marvin Fong has given his Buy rating due to a combination of factors related to the recent allegations and the underlying fundamentals of Carvana’s key partner, DriveTime. He contends that claims about extreme leverage at DriveTime are overstated because the calculations incorrectly treat securitized, bankruptcy-remote assets as if they were fully recourse debt, and they also rely on an EBITDA measure distorted by portfolio valuation marks. When these marks are stripped out, Fong’s adjusted figures imply far more reasonable leverage and interest coverage than critics suggest, reducing the perceived risk of a DriveTime-driven collapse that could harm Carvana.

Fong also disputes the argument that Carvana’s results are being artificially boosted by below-market servicing fees charged by DriveTime, explaining that the bears’ methodology uses an inflated base of “third-party” receivables and ignores outstanding loans originated in prior years that DriveTime continues to service. In his view, this leads to an erroneously low implied servicing rate and an overstated level of fee underpayment, particularly when critics extrapolate it over an unrealistically long period given how quickly subprime auto ABS pools amortize. Together, these points lead Fong to see the latest round of allegations as fundamentally flawed and not thesis-changing, reinforcing his conviction that the market is mispricing the stock and that Carvana’s shares warrant a Buy rating despite the recent pressure.

Based on the recent corporate insider activity of 367 insiders, corporate insider sentiment is negative on the stock. This means that over the past quarter there has been an increase of insiders selling their shares of CVNA in relation to earlier this year.